Good reads from around the Web.
I have often sung the virtues of cash, which – despite my love affair with shares – I consider the king of the asset classes.
For example, I have been happy to suggest new investors start with a 50/50 cash and share portfolio, rather than bothering with bonds. And I have commented many times over the years that the official historical record underplays the benefits of cash as an asset class, because it considers cash from a stodgy institutional perspective, rather than that of a rate-tarting Monevator reader.
I’ve even argued with a certain UK blogger – an online chum who has long hated the stuff, and believes it’s a zero-gain asset after inflation – that cash can sometimes clean up, especially when you’re actively seeking the best rates. (We had that friendly tiff the last time research appeared showing that actually, cash could be surprisingly competitive).
Even my co-blogger is a secret rate tart, despite his feeling that we’re best-off assembling our portfolios with the more traditional building bricks of bonds.
So I wasn’t particular surprised this week when readers started pointing me towards research from Paul Lewis, the presenter of the BBC’s Moneybox program, that showed cash had beaten shares over various periods of time.
Making a splash via the FT [search result] and also writing on his own blog, Lewis stated:
Money in best-buy cash savings accounts produced a higher return than a FTSE 100 tracker over the majority of investment periods from 1995.
Money put into “active cash” beat the total returns from the tracker in 57 per cent of the 192 five-year periods beginning each month from 1 January 1995 to the end of 2015. No account is taken of inflation, which affects money in cash or in shares equally.
For longer periods, the difference was even more marked. In investments made over the 84 14-year periods from 1995 to 2015, cash beat shares 96 per cent of the time.
Only periods of 18 years or more showed shares outperforming cash more often than not. But assuming you can find 20 minutes a year to search for the best rate and move your money over a shorter period cash really can be king.
There’s more to his piece than that, and I obviously can’t excerpt it all here – please follow the links above for more on his methodology and findings.
It’s also worth noting that even he concludes:
Cash, of course, is not for everyone in all circumstances.
Over long periods, a simple share index tracker is probably best.
However that isn’t the headline of the article, and it’s certainly not the impression people were taking away from his piece.
Why bother with shares when you can do better with good old cash? That was the more appealing message.
Dash for cash?
If cash did deliver superior returns to investing in equities over most periods then there’d be absolutely no point in bothering with the ups, downs, and uncertainties of shares.
Indeed that would be the conclusion of most of us even if cash moderately under-performed.
An easy and stress-free life in the safety of cash earning say 6% would beat the scary and potentially ill-fated pursuit of say 7% any day.
But I don’t believe that’s what Lewis’ research really suggests, even on its own terms – and moreover that its own terms miss the bigger picture.
As Merryn Somerset-Webb – writing in the FT [search result] in a good piece that was annoyingly published just after I’d finished mentally drafting this one – Lewis’ comparison is a stretch:
Mr Lewis’s research makes an important behavioural assumption: that investors are too supine to move from the HSBC FTSE 100 tracker he uses for the comparison for the entire 21 years in question, but that savers have the energy to move to the best-buy account on the market every single year.
That makes his comparison a little bit apples and oranges: a lazy and utterly uninquisitive equity investor takes on a fantastically energetic and research-oriented cash depositor.
The FTSE 100 has been a dud of a market for decades. In the past I’ve considered it a good starter to get people comfortable with equity investing (although these days I am pointing friends who ask towards Vanguard’s LifeStrategy funds and other global trackers) but nobody should have it as their entire portfolio for Lewis’ 21-year period.
A better comparison would be with an investor with a properly diversified and regularly re-balanced portfolio that had money invested in other risk assets such as the US, Europe, Japan and the emerging markets, and property, bonds, and gold – as opposed to just one relatively odd index that has been through two deep bear markets during the period and has recently suffered from its skewed weightings towards commodities and banks.
Of course you might argue that during other times the FTSE 100 might benefit from its exposure to those sectors, but that brings me to my second big beef.
Lewis writes on his blog that:
“For a cautious person investing for periods of up to 20 years this research indicates that well managed active cash beat a FTSE100 tracker more often than not.”
But that is not what his research shows, in my opinion.
What he has pointed out – and as I said at the top, I think it’s worth pointing out – is that over a specific 20-year period from 1995 to 2015, cash has done well against the UK’s main market, and that you don’t hear much about that from the fund management industry.
But this is just one 20-year period out of, well, at least a hundred you could reasonably compare it to.
Lewis does analyze smaller multi-year periods in his research, but they are all from within that same two-decade block.
And why start in 1995 anyway? Why 20 years? Why not 23 years, or 17?
I wouldn’t be too hard on this – all looking backwards must by necessity have constraints – but equally I wouldn’t make too bold assumptions based on what I found.
It would in my view be foolish to turn your back on shares and their demonstrably superior returns over the past 100-odd years based on just this last 20-year period – not least when that period was marked out by banking craziness that put growth ahead of profits, and thus might lead you to suspect that the Best Buy booty we saw in the past might not lie in our future.
Lowly yielding world
On that last point, I’m not quite as bothered as some of Lewis’ critics by today’s low interest rates versus those he studied.
As I say, I think it’s quite possible that because of the beanfest that was consumer banking before the crisis, Best Buy rates were too generous back then and won’t be so in the future.
But when it comes to the wider low-yield world we seem to live in, there are two contrasting interpretations as to what it means for shares.
The optimistic view for equity investors – and the one I’ve tended to lean to – is that low rates on cash and bonds are mainly reflective of severe risk aversion among investors, and also of the artificial, remedial action (low rates and QE) taken by Central Banks to avoid the banking system going bust.
Through this lens shares might be a bargain, because it could mean they are not relatively cheap compared to cash and bonds for any good reason except that people are scared of them.
However the other interpretation – which is surely at least half-right – is that low yields are reflective of a wounded, over-indebted global economy that will take many more years to get over the after-affects of the credit crunch.
If that’s true then shares only offer the seeming potential for higher returns (via higher dividend yields, say) because they are more risky. Their apparent cheapness could be because they are pricing in the possibility that those dividends will be cut in the face of more economic shocks.
We could debate this all weekend. The point is that you can’t really say “cash only pays 1.5% these days but shares have delivered 10% over the long-term” without at least considering that your projected 10% figure might be far too high too in today’s low-yield world.
So Lewis gets a pass from me on that complaint.
Digging into the data
A last and more niggly point is that in explaining his workings, Lewis highlights a laundry list of caveats.
Each one he says doesn’t really change the results – but what if they were all added up together?
For instance, he ignores tax despite using Best Buy interest rates that were available only on taxable accounts (as opposed to ISAs). He ignores the time lag affect of moving your money every year. I also wonder about the veracity of data systemically taken from the January issue of magazine that would have been physically written and printed in the prior month?
Again, I don’t want to come across as too harsh on his piece.
On the contrary I applaud Lewis for doing the research – I haven’t got the resources to do any better job here – and I think his main points about the benefits of seeking the best interest rate on cash, the non-trivial risk of losing money in shares, and that the vested interests of the finance industry will usually encourage you into products that make it money are all worthwhile.
However I wouldn’t start pretending you can enjoy equity-like returns from the comfort of cash indefinitely. As he himself says, cash should not be the main driver of any truly long-term strategy.
- If you want to read more, don’t forget Merryn Somerset-Webb’s article I linked to above.
- Lewis’ research was also picked up by ThisIsMoney, which among other things features a Hargreaves Lansdown analyst rather predictably comparing cash to a top-performing active fund, as well as more reasonably highlighting what he claims is the slight edge of the average UK fund over the FTSE during the period. (Perhaps true, but many UK active funds have enjoyed a big boost in recent years by being very underweight the commodity sector. Will this last? Also beware of survivorship bias, where dud funds that were shut down may have been stripped from the data).
- The Guardian was rather bowled over by the research.
Have a great weekend!
From the blogs
Making good use of the things that we find…
Passive investing
- 10 things I believe about investing – A Wealth of Common Sense
- Reversal of fortune for all 2010’s top fund managers [Tweet] – Meb Faber
- Vanguard’s active funds haven’t outperformed – IFA.com
- Why passive investing boosts corporate activism – Wharton
- Smart Beta is more expensive and introduces risk – Dual Momentum
Active investing
- Yesterday’s strategies from investment gurus – Oddball Stocks
- Income investors’ growth bias is an opportunity – The Value Perspective
- How Norway’s Warren Buffett built a $2 billion fortune – Marketwatch
- Be aware of the capital investment cycle – UK Value Investor
- Sector surfing is performance chasing – The Reformed Broker
- Learning from mistakes – What I Learned On Wall Street
Other articles
- The worst mutual fund in history – Dividend Growth Investor
- Insider trading: Hot tips to make you rich – Under the Money Tree
- Compare your spending with the rest of the UK [Tool] – MBNA
- P2P: A warning from the richest man in Babylon – The Escape Artist
- Retirement amplifies bear market fears – SexHealthMoneyDeath
- An introduction to The House Crowd – The FIREStarter
Product of the week: The mortgage giants are cutting rates ahead of a potential Brexit rate plunge, reckons ThisIsMoney. Both Halifax and Nationwide have slashed rates across the waterfront; you can now get a 10-year fixed rate mortgage from Nationwide that charges just 2.99%. Gulp.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1
Passive investing
- How the financial services industry feeds itself first – Guardian
- Investors underperform everything – Morningstar
- Millennials go passive, but are still too confident – ThisIsMoney
- Mad money. Questionable ethics – Huffington Post
Active investing
- Lloyds bondholders lose final battle in Supreme Court – Telegraph
- Will Google or Facebook buy Twitter? – Vanity Fair
A word from a broker
- Gilt yields are at record lows. What’s next? – Hargreaves Lansdown
- US equities: Large cap versus small cap – TD Direct
EU Referendum: Make your mind up time
- A reading list of the best pro/anti-Brexit articles – ThisIsMoney
- Will Brexit bring UK property doom or property boom? [Search result] – FT
- Nutmeg has cut risk exposure ahead of EU Vote – Telegraph
- The Guardian’s finance editor is voting to leave the EU… – Guardian
- …but FT’s former PF editor foresees gloom in a Brexit [Search result] – FT
Other stuff worth reading
- Millennials set to embrace micro-investing [Search result] – FT
- £37,000 temporarily “disappeared” during ISA transfer – Telegraph
- Should you only buy or sell funds in the morning? – Telegraph
- Developers are offering incentives to shift London flats – Guardian
- Bit of a hatchet job on the on-demand economy, but interesting – Guardian
- Fintech’s DIY problem [Search result] – FT
- How and why you should hire “originals” – FirstRound [H/T AR]
Book of the week: If you liked the piece on the Norwegian super-investor, you might like the authors’ longer book, Concentrated Investing. It profiles value investors who bet big on their best ideas. I’ve not read it yet. I might!
Like these links? Subscribe to get them every week.
- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]
I read Paul’s full analysis, and one thing that gets overlooked with the focus on winners is the margin of the win. Saying that over periods cash wins 57% of the time is of little use if the margin is small, if the 43% of equity wins have larger margins. That may not be the case with such a volatile thing as equity, but the key result he doesn’t say is if you invested the same sum at each of the start points, what would your cumulative return be at the end of them all, as after all, that is what a pension is.
Monte-carlo simulations of markets tend to show that equity upsides are much bigger than downsides (the dividends cushion the downsides) so the risk gives rewards.
Market timing is a difficult thing, regular investing is best to give you a range of scenarios
Vanguard’s active funds haven’t outperformed – very relevant article because there are some new active Vanguard funds available in Europe.
A Japanese investor would have found that cash did much better compared to equities than a UK investor, and someone investing in the US the exact opposite. I like cash in its place, and we have 3 years of essential spending held as cash, but it’s only 10% of our total savings and investments. However, we’ve always used a diversified approach (caps, territories and asset classes) so perhaps this is why we’re equity hogs?
The big killer to Paul Lewis’s cash comparison is his rider
What flippin’ use is that? It isn’t enough to help people save for retirement (where you need to end up with £250,000 and up), it’s not even enough to save for a deposit on a rabbit hutch (my deposit in 1989 was more than his max and was worth a damn sight more than that now). It’s just not a useful amount of money in the grand scheme of strategic lifetime savings.
Yes, you can still now get a decent interest rate on cash for about £2500. But unless you like filling in loads of forms to tart your cash around 10 plus different accounts a year you can’t even bring the odds up to sheltering £50k. And every single time you open yet another account that’s one more chance for some bunch of buffoons to leak your personal details to hackers or criminals, so the cash limits make this a low-rent and not totally riskless enterprise.
It’s a great headline. But it’s not a useful action plan. If you have an upper limit of lifetime savings of £10,000 yes, there’s a very strong argument to be made that you shouldn’t be in equities, period. You can’t take the risk. If you have more, then your cash rate of return will fall, asymptotically I guess towards those institutionally rich bastards who were griping.
I’m not saying it’s a bad thing – I am all for the poorer parts of society being able to get a better return on their hard-won cash that perhaps the average Monevator reader let alone the 1%. We should protect our widows and orphans, it’s the hallmark of a civilised society. But there should have been a great big rider on this ‘research’ that it only applies to a specific case, and not to the class of scenarios that readers will need to save for retirement, a house deposit, or even to blow on sending their children to private school. Edge cases are interesting. But inferring the general from the particular is great for headlines but ropey epistemology.
@ermine — Ack, good point, I meant to mention that caveat. In practise you can take cash far higher than £10k and earn returns within sight of the Best Buy, but compounded over 20 years it’s another reason to take the findings with a pinch of salt IMHO. 🙂
The piece has certainly re-lit the cash/shares debate.
Here’s another critique: It would have been nice if the research also included mixed portfolios rather than the binary 100% cash or 100% equities. In investing as in life, the middle way is usually best.
For example, Paul could have included 90/10, 80/20 (etc.) cash/shares portfolios and mentioned how the “optimal” blend changes depending on how long the investment is expected to last.
On the plus side, I would say that it highlights that shares are for the long-term, and anything less than 10 years is really not appropriate for a 100% equity portfolio.
Personally I like the idea of holding no more than 10% in equities for every year the investment is expected to last. So if you want your money back in five years, have no more than 50% in equities (so 50% in cash), or three years and you would have no more than 30% in equities (70% cash). Of course it depends what the investment is for as well and what your absolute risk tolerance is, but as a general rule of thumb I think it’s a good starting point.
The FTSE 100 index is and has been dominated by a small number of companies: the top 10 currently comprise 39% of the index. So Lewis is comparing a very concentrated share-only portfolio inadequately diversified by company, sector, company size or internationally with a theoretical Best Buy cash portfolio with low investment limits.
‘Over long periods, a simple share index tracker is probably best’. A dangerously misleading and irresponsible statement if read by a relatively unsophisticated audience.
“The FTSE 100 has been a dud of a market for decades.” Isn’t that a bit strong? Or am I perhaps not putting enough emphasis on the “decades” part? I’ve just gone and had a quick poke around the web and looking at e.g. http://www.hl.co.uk/funds/fund-discounts,-prices–and–factsheets/search-results/h/hsbc-ftse-100-index-class-c-accumulation/charts, it seems to me that from Jan 2012 to Jan 2016 with dividends reinvested it’s returned about 25% (I’m reading the numbers off the chart by eye so they’re approximate) which I make to be 5.7%/year on average. Taking the whole period of the chart (June 2011 to June 2016) it returned about 25% there as well, which would be 4.6%/year. Isn’t that about the expected long term return?
I’m a fan of Merryn, but she over-eggs the pudding with this: “savers have the energy to move to the best-buy account on the market every single year … a fantastically energetic and research-oriented cash depositor”. Once a year, perhaps prompted by a letter from the Building Society, our investor has to open his weekend Personal Finance section, and look up the current best rate. He scarcely has to interrupt munching his toast, completing his sudoku or wrestling with his crossword.
Now, of course, he would probably use high interest current accounts and regular savers instead: harder work, but eminently clickable.
“These were called “Dead man’s funds” because they were always in the bottom performance chart. Yet, some investors stuck to those funds for decades. The amount of assets under management went from $100 million in the 1970s to $8 million by the time of the death of Charles Steadman … Due to high costs to run the funds, they ultimately failed … [by] the 1990s and 2000s, many of the fundholder accounts were deemed “legally abandoned”, because they were owned by dead person’s with unsettled estates or elderly investors who had forgotten about the investment.”
I did laugh. But this is the sort of nonsense that probably explains some people’s reluctance to leave the safe haven, as they see it, of cash. When I was a boy Confucius was often cited as a source of wisdom, using made-up quotations in cod Chinese English: “City waters full of sharks” covers the case here.
Cash is often overlooked — it’s a wonderful place for wealth to lurk while equities get cheap — and for retail investors, there are all sorts of cunning ways to get decent returns far above the risk-free rates available to institution who are limited to govt bonds.
However, anyone taking that Paul Lewis article at face value is being badly misled, and I’m annoyed at the FT for allowing this rather dangerous headline to stand. His blog has the decency to point out the glaring faults in his analysis and the statistically heinous approach — but I can only assume he wrote the conclusion words that it’s a 20 year time horizon over which equities beat cash and it’s wrong. Dangerously so. Look at the comments on the article — the most recommended on Paul Lewis’ is someone saying they feel better that they are leaving their pension in cash. Err. In the best buy 1-year bond in a SIPP? Extremely unlikely. Sure — a shovel full of cash in a pension right now might be really smart with a high volatility event next week, but not for the reasons in the article. And personally I was exasperated this week to see advice given to a friend asking about junior ISAs (an 18ish year investment) where cash isa’s were being held up as the only option.
If he presents his data on his blog, as I’ve requested, then I’ll recrunch it with the goal of discovering the truth rather than posting up a contrary headline. One can only assume that the temptations of the fund management industry to hike up hidden fees, so admirably lambasted in Merryn’s column, are similar to the temptations of the newspaper industry to hike up headlines. And armchair investors need to be equally wary of them both.
Thank God for The Monevators of this world – fine purveyors of boring* truths. Like your level-headed analysis above, TI, but really feel the boot needs to be put in a little harder on this one… Mutter mutter grumble grumble. Grumpy old me etc etc.
* actually fascinating within a certain audience…
Paul’s article could not have been written in Dec 1999 !
A snapshot of any past twenty years as pointed out above, tells us very little.
There is nothing new here for those who are attuned to valuations.
see :-
http://www.smithers.co.uk/page.php?id=34
Even the S&P has not been immune. If we start with those extraordinary valuations in most World Stock Markets at the turn of the century, what on earth did investors expect going forward ?
It is taking time for those excesses of the 90s to work their way out of the system.
We all know the last twenty years have been dismal, except for those who have followed TI’s advice, by diversifying internationally and most important of all as TI points out REBALANCED repeat REBALANCED..
This investor although not using the usual Constant Ratio Investment Formula Plan, has by several multiples outperformed Cash over the period in question, and thank goodnesss for that !
It would have been more apposite for Paul to have asked :-
“How do Stocks and Cash look going forward today?”
Let’s turn to our old friend The Gordon Equation, ignoring for now the UK market, hobbled by oil co’s, miners, banks, etc:-
Long Term Market Return = Dividend Yield + Dividend Growth
Stocks (US 2016) = 2.2% + 4.5% = 6.7%
Cash (UK 2016) = 2.0% best? + 0.0% = 2.0%.
John Bogle adds to the Gordon Equation a third stage, ‘Speculative Return’ , and my goodness did that not swing the numbers in the late 90s.
Does Cash have a Fixed Income role in our portfolios?
My goodness YES !
Today with irrational/scary Bond valuations outweighing by far the Stock valuation concerns, the answer is more than ever YES YES YES !
Good Luck to us All
P.S. See even Hargreaves Lansdown are getting twitchy about gilts in the above link “Gilt yields are at record lows. What’s next?”
There is this uncanny sense with Bond pricing that we have seen this all before with the Stock Bubble of the late 90s.
However how and when the Bond Bubble will burst is unknowable.
It could well inflate further yet and for more years than we might think possible ! “Irrational Exuberance” from Greenspan was too early a call in the 90s.
You say “I have been happy to suggest new investors start with a 50/50 cash and share portfolio, rather than bothering with bonds.” but a quick comparison of the 10 year annualised return of the HSBC FTSE 100 tracker with the 10 year annualised return of a bond fund (Fidelity Moneybuilder Income; I couldn’t find a bond tracker fund with a 10 year history), shows the FTSE 100 returning 3.8% per annum and the bond fund returning 5.1% per annum.
The bond fund also outperforms the FTSE100 tracker over the 20 year period 1995-2015 (I can’t cut and paste the graph from Trustnet). I’m not making any claims about the future, just making the point that over the last 10 or 20 years, bonds would have done better in the Paul Lewis comparison than the FTSE100 tracker and it’s likely that a rebalanced 50/50 bond and share portfolio would have outperformed a 50/50 cash and share portfolio.
Our portfolio is dwarfed by the value of our house and by the capitalised value of our pensions; those are currently our equivalents of equities and bonds. So the portfolio has to provide all our flexibility, diversification, and liquidity. Lots of cash, then, and no FTSE tracker.
I was wondering if a sensible conclusion to take away is that if interest on cash becomes close to the expected long-term return on shares taking costs into account (say, 6%), as it was for much of the period Lewis studied, then it makes sense to hold a substantial amount of cash? That would imply that cash is not a good place for investments today.
@dearime… I own my own home and have a defined benefit pension…in my early [mid] 30’s I’m solidly in the accumulation phase… I always think my ISA should be 100pc equities as the other two ( no rent / guarenteed income) make up for the cash/ guilts elements a non home owning defined contribution pension owning person would need ?
@all… Paul Lewis allows for a cost of 0.18pc for the tracker…
… My platform charges 0.25pc so I’d say that was generous.
Many studies have shown that timing the market by, say, holding a stocks:bonds ratio that scales with the CAPE does not improve returns. Any gain from market timing is lost to the exposure to low-return bonds. What I’m wondering is whether this conclusion holds up when the portfolio is stocks:cash.
The Paul Lewis story gives a lot of pause for thought but it suffers from a lot of flaws.
Paul’s limit of £10,000 cash is an immediate red flag. What would the results have been if the best buy accounts had to cope with a cash allocation that might actually fund a decent retirement?
He focuses a great deal on short-term timeframes (5 years and less) within which shares are bound to fall short a great deal of the time due to volatility. No-one recommends holding 100% shares for goals you hope to reach within 5 years.
Paul fully admits that shares losing to cash over 14 year timeframes is because of a bear market in his data set.
Then goes on to say that somehow you can extend his conclusions to any timeframe because his dataset is typical. We know that asset class performance is extremely sensitive to the timeframe’s chosen – this is why fund managers can make a new fund strategy look amazing if they choose the right dates. This is the most misleading part of the story for me.
Most US thinkers on this topic believe that the 100-years+ worth of data they have is not enough. There’s a good article here from Wade Pfau that touches on the issues of using historical data: http://www.forbes.com/sites/wadepfau/2016/06/13/the-advantages-of-monte-carlo-simulations/print/
The story shows that the winning margin of shares is greater than cash during periods when it comes out on top. What we’re really seeing unfold in Paul’s story is the inherent volatility of shares.
If Paul’s point is that shares aren’t the right tool for the job if you want to save for something in 5-years then spot on.
But I truly hope the headlines being grabbed won’t lead people to conclude that cash is the way to go if you want to save for your retirement.
I can’t get those best buy accounts in my pension funds and Paul doesn’t take into account the massive boost that tax relief gives to retirement investments.
And again, I struggle to think of responsible commentators who portray asset allocation as all or nothing. 100% this versus 100% that.
@ PA – the cost for the tracker is accounted for in its net returns. So until a few years ago, something like 1% is being shaved off the tracker’s returns. Now it’s 0.18% since HSBC responded to Vanguard’s entry in the market, but costs had a much higher impact through most of Lewis’ analysis. He’s certainly correct in pointing out that standard presentations of share performance do not include costs and this can make a big difference.
@ John – If stocks beat cash as they ultimately do in Paul’s story then 100% stocks maximises your returns – if history repeats itself. But, portfolio theory and empiric data shows a mixed allocation improves your risk-adjusted returns i.e. you can still achieve good (but not optimal returns) for proportionally less risk incurred.
@PA: I think of our house as equity-like because it doesn’t have a specified value at any point in the future and doesn’t produce a specified annual coupon; we can hope that over a long enough term it will increase in value. Happily its “dividends” exactly cover what would otherwise be our liability of paying rent. Eventually its value will presumably have to cover the excess of the cost of “care” over the pension income.
The pensions are like bonds in that they pay out index-linked “coupons” on known dates, and have a known value at a specified point in the future i.e. zero, on the death of the second of us. In real terms we don’t expect any growth from them. Our company pensions are a bit like corporate bonds: just as companies can default, our DB pensions might fall into the PPF, which would hit their value hard by reducing their inflation protection to nugatory levels. We view our State Pensions as being something like index-linked gilts. Fingers crossed.
The problem is that there’s no flexibility in either the “equities” or the “bonds”, no liquidity, not much diversification, and they are both denominated in GBP. So those deficiencies point the way for us to invest our portfolio. I doubt if this logic gives much help to someone in his thirties. You’ve got lots of “personal capital” i.e. the present value of your future earnings, though if that and your house and your future pension are all in GBP, that might be a pointer to invest in equities ex-UK.
@PA – I think of a primary house as a reduction in the FIRE target rather than part of the investment portfolio. A mortgage on it is an increase in that target. Otherwise you end up with a chronically unbalanced portfolio and considering it as a the FI part means that you’ll have nothing to sell when equities crash and you want to rebalance.
@TA…thanks, guess it was a bit naughty of me to comment without reading it! That said, if he worked in a 1pc charge on the fund, ignored tax, and got the best rates available for c.2000 – 10,000 I think we’re prob right to continue with shares in any case !
@dearime…interesting and I don’t disagree ! I’m about 1/6 of my shares in the FTSE all-share… we’ll see how it goes. The dream would be to own one of these villas near Disney and rent it for a USD income…but I’m nowhere near that atm
@Mathmo…please don’t flame me for saying this.
I don’t 100pc agree with the premise “a house is a house is a house”.
I bought in an area estate agents would generously describe as “vibrant” 9 years ago in inner city East London…and the valuations relative to where I grew up in the West Country no longer have any meaning.
I could buy the house I grew up in now with the equity I have in this place…and as I intend to retire outside of London hoping to have money left over when I sell it… I appreciate most people have to buy a home as expensive as the one they sell but I think it is possible for your home to be an actual investment…
@PA – I’d hope not to flame anyone for anything…
I really struggled with the issue of the house and mortgage vs the liquid invested portfolio, and also other illiquid business assets when I set my portfolios up. And the crux of the matter is the issue of rebalancing.
I have some properties which are definitely investments, and one which is definitely a roof over my head. I might move out of the one which is over my head, and either rent or pay for a different property — and if I do that, I’ll treat it differently as either a capital sum if sold or an income stream if rented out.
But until I choose that option, I treat it entirely separately as a reduction in expenses (ie rent I don’t have to pay) and ignore its value for portfolio purposes (I do record a fair face value in my quarterly balance sheets). The illiquid assets — included rented property and their mortgages — I lump together and consider as an income stream which is taken off the FIRE target, and all the rest is treated as a liquid portfolio which is balanced according to my asset allocation with the goal of growing. It might be that some of those liquid assets crystallise into cash (ie get sold) – in which case I will move them into the liquid portfolio and rebalance away. But until then I do not take heed of their valuations in my portfolio analysis — only in deciding whether to continue to own or to dispose of any particular asset. Their income is considered in my FIRE calculation and that’s both more stable and more relevant to me than their valuation.
This has a weakness that it leaves me with unknown and unrebalanced exposure to property and other illiquid assets, but it means that I have very tight control and rebalancing on the liquid part of the portfolio.
FWIW, the liquid portfolio is a really nice yield and a lot less bother than the illiquid portfolio!
This is a very thorough review there Monevator. Thank you for the mention!
From a contrarian perspective, it seems that if more people realize that past performance of fixed income was greater than equities over a certain time period, we may be in for some ” reversal to the mean”. In other words, while FTSE 100 has not done so well over the past 16 – 17 years, and has worn out patient shareholders, it is very likely that it would produce better results over the next 10 – 15 years relative to say UK Gilts/fixed income.
I would think that some allocation to fixed income could be helpful, but long term one cannot expect much in returns there.
Dividend Growth Investor
I think it was Benjamin Graham who advised that unless you could think or a good reason to do otherwise, hold 50:50 shares and bonds.
Of course, back when he was writing, fixed interest had a yield *premium* over equities as the former don’t tend to have any inflation protection whereas the latter generally does. This slowly changed with a “risk premium” now being seen as normal, so equity dividends higher than bond yields, but inflation is a capricious thing, and things could flip back very quickly.
I think the currency markets and the london stock exchange decided on what the referendum outcome was yesterday
I notice that good judgement inc. i.e. tetlocks superforecasters have brexit at about 23% which is very close to betfairs 22%
So remain it is then..
@The Rhino…if 22pc events never happened there wouldn’t be a bookmaking industry ;0)
@Mathmo… thanks, how to measure what you need, and what you have, is probably the most difficult part of the whole thing…at the moment it’s more important I accumulate equities than worry about it too much, but in the years to come may well incorporate your thinking into what works for me cheers
@PA yes your right, but there is a discrepancy between media reporting of various polls and this more ‘market-like’ data in as much it may not be all that tight a call after all.. I’m just having a crack at sticking my neck on the line – its going to go ‘remain’
In a way, the £10k cash limit fits nicely into the emergency funds allocation, assuming that rate tarting doesn’t tie up your cash for more than a few days. Once retired, lifelong spreadsheet jockeys might enjoy the challenge of squeezing the banks on their current account bonuses, and have the time to do it.
@PA “….. if 22pc events never happened there wouldn’t be a bookmaking industry …..”
Not so but if there weren’t “punters” prepared to gamble on the happening of “22pc events”, then there wouldn’t be a bookmaking industry.
Today I finally bought my Euros for our holiday in Spain next week. Buy on the rumour …
@gadget – well today was definitely better than yesterday, which was better than the day before but I would have used an ATM (with you clarity card obviously) next week for even more euro goodness
to be fair though, the swings prob amount to a beer or two over the course of the old holiday so do we really care?
On the other hand – at the opposite end of the spectrum, I can imagine RIT is gripping on to that toilet seat super tight right now.. best laid plans and all that..
Opinion polls find out what people say to researchers. You need to find the right people, and not have the interaction with the researcher bias things. They also need to sample the complete electorate, when in face they’ve missed out NI and expats (6% of the electorate, and wanting to Remain to get their pensions)
Bookmakers merely need to lay off punters against each other with generous margins. They are delighted to accept irrational bets, and only a small, unrepresentative fraction of the electorate. Their odds will change as the bets are placed, not as their opinion of the outcome changes.
Financial markets are also full of people making bets, but with the big boys being rational, the private investor often not.
Friday could be another candidate for me pulling the trigger, but I’ve had a lot of them this year.
@JB christ – its not that bad is it? don’t do it! You’ve everything to live for..
According to the Barclays Equity Gilt Study (BEGS), equities have given a long term real rate of return roughly 4% higher than cash. However, as Paul Lewis points out (and as discussed on Monevator in the past) the BEGS measure of cash is lower than the best buy rates one can get.
According to PL’s blog: “Over the 21 years the average rates are BoE 1.59%, BEGS 2.67%, Money Facts best buys 4.51%.” In other words, BEGS is understating the return on cash by nearly 2%, for anyone who can be bothered to shop around. It strikes me that the 2% differential is about right.
In that case, the true difference in long term returns on equity vs cash is more like 2%. So, equities are still better, long term, but not as much as BEGS suggests. To me, that’s the real conclusion to be drawn.
And so ends my short-lived forecasting career. Prob a message for me in there somewhere?
The key reminder/lesson is what @PA said: “If 22pc events never happened there wouldn’t be a bookmaking industry.”
A useful reminder about how probably works.
@TI quite. A busy day for you I might imagine? Deals to be done! Good luck!
Cheers! Yes, a day where I’d rather I was passive. (As Lars K said to me earlier today “this is exactly the sort of day where you are glad you own a global tracker with natural currency hedges.”)
Whatever you do, don’t look at your portfolio today.
In more heartening news, a good analysis of the Paul Lewis piece here including a rerun of the result with a global portfolio:
http://www.finalytiq.co.uk/paul-lewis-got-active-cash-beat-equities/
Well I did look at my sipp portfolio to inspect the devastation when I got home from work.
Somewhat shockingly though, apart from my two uk trackers (all share, and ftse 250) everything else is up!
Emerging markets, property, infrastructure , and bonds all up by 3-6%.
My global Tracker was up a bit too.
I’m assuming it’s because the pound tanked, but I was surprised none the less.
@Jaygti — Yes, it’s been a great day for remembering how investing overseas can diversify your portfolio through currency as well as markets.